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A Humbled Gap Tries a Fresh Coat of Pep

Part of the new design in the Gap store at the Grove, a mall in Los Angeles. Executives hope that the cheerier surroundings, among other changes, will bolster sales.Credit
Monica Almeida/The New York Times

Yet this is a Gap — at the Grove, an upscale mall in Los Angeles. Only it’s more than a Gap — it’s a laboratory for reviving the brand, one of the great hot-to-not stories of American retailing.

After defining 1990s khaki culture, Gap fell hard in the early 2000s. Management missteps, executive turnover and, not least, unappealing fashion punished sales. It was a remarkable comedown for a chain that once seemed to dictate how America dressed.

The chief executive of Gap Inc., Glenn Murphy, has tried to satisfy Wall Street by cutting costs and closing stores. But sales last year were about where they were in 2002, despite big pushes overseas and online. (While Gap is the marquee brand, the company also owns Old Navy, Banana Republic,Piperlime and Athleta.)

What went wrong? Dozens of interviews with current and former executives depict a company that chased after rivals, rather than charting its own course, and that cut quality and lost touch with customers. Simply put, it filled its stores with stuff that people didn’t want.

Which is why what’s happening at the Grove is so crucial. On a Tuesday in March, Art Peck, the president of Gap North America, surveyed the scene and liked what he saw. “If you drop someone in here and say, ‘What store are you in?,’ nobody would say the stereotypical Gap store,” Mr. Peck said.

That, he implied, is a good thing. Mr. Peck wants to update Gap’s more than 1,000 North American stores.

At the Grove, Gap is testing ways to build sales. The cheerier surroundings are a start. It’s also trying dressing rooms in the center of the store, and an on-site stylist. Other Gap stores are being spruced up, too, and, as Mr. Peck put it, Gap is “making sure our body forms all have the appropriate number of limbs attached to them.”

The new clothes reflect Gap’s upbeat, “Be Bright” advertising campaign. And as those products hit the stores, Gap is getting a bit of good news. In February and March, same-store sales shot past analysts’ expectations. The share price of Gap Inc., the parent company, is clawing its way back, too. It had plummeted from $53 in February 2000, when Gap’s dot-com-era khaki was burying its rivals’ more formal business wear, to $9.50 in November 2008, at the height of the financial panic. On Friday, it closed at $28.53, up nearly 54 percent so far this year. “We really believe we have a diamond, and we just need it to be polished properly,” Mr. Murphy says.

IT’S hard to overstate Gap’s place in American retailing.

When Doris and Don Fisher founded the company in 1969 in San Francisco, they basically invented the specialty apparel store. Gap sold Levi’s in a bunch of sizes, aimed at the generation gap — hence the name.

When Millard S. Drexler arrived as chief executive in the ’80s, Gap began selling its own clothes. Gap Inc. expanded Banana Republic, started Old Navy, and went on to dominate American clothing retailing for almost two decades. But by 2002, breakneck expansion caught up with it. The company was close to bankruptcy, and Paul Pressler, a Disney executive, was brought in as C.E.O.

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The Gap executives Pam Wallack, Stephen Sunnucks and Art Peck in a Manhattan store at Fifth Avenue and 17th Street. “We had to restate what Gap was about,” says Ms. Wallack, who leads Gap’s global creative center.Credit
Michael Falco for The New York Times

Yet by then, rivals like Zara and Juicy Couture were challenging Gap’s all-things-to-all-people approach. In 2007, Mr. Pressler stepped down and, according to someone familiar with the matter, a board representative reached out to Mr. Drexler, who by then was running J. Crew. Would he return if Gap bought J. Crew? he was asked. Nothing came of it.

Bill Chandler, a Gap spokesman, says that if this happened, it did not represent the board’s point of view.

“It wasn’t like he came in and was like, ‘It’s all about beautiful product and the right marketing’ — there was none of that,” recalls Will Hunsinger, former general manager of Gap’s online unit. “It was, ‘We’ve got to learn how to work more efficiently.’ ”

Mr. Murphy set about cutting costs, closing stores and pushing international growth. And on some fronts, the strategy showed results. Gap is growing fast in China and elsewhere, and Gap Inc. is still making money: profit was $1.1 billion in 2009, $1.2 billion in 2010, and $833 million in 2011, in the same range as in the middle of the last decade.

But he largely left the fashion side of Gap alone. When clothes didn’t sell, he focused on market-share strategies rather than on trying to rethink what Gap was about. Some executives found this approach lacking.

“He brought classic grocery retail principles, which is good, but it’s a little easier doing that with toothpaste,” says a former inventory executive who, like many former executives interviewed, spoke on condition of anonymity since they weren’t authorized by Gap to comment publicly about their time there.

Mr. Chandler, the Gap spokesman, said that “it is not part of Glenn’s role to lay out the creative vision — the brand leaders are responsible for this with their creative teams, which Glenn supports and encourages.”

GAP seemed to lurch from one new thing to the next. Mr. Murphy noticed momentum at the trendier Express chain, and at one point encouraged Gap executives to watch what Express was doing. Marka Hansen, then Gap’s brand president, and Patrick Robinson, its chief designer at the time, decided to go after Express and Macy’s.

“The next product review meeting looked like we’d just walked out of a nightclub,” with sparkle and glitter, one former Gap executive recalled. (Mr. Robinson declined to comment for this article. Ms. Hansen did not respond to requests for comment.)

That didn’t sell, so Gap shifted again. Another former Gap executive recalled how, one season, executives were asked to focus on women’s career wear, only to be told the next season to get back to Gap’s core, denim. “Then it’s, ‘Don’t focus on the denim business; focus on tops,’ ” another former executive said.

The stylish Mr. Robinson had previously designed for brands like Paco Rabanne and Perry Ellis, and is a friend of Anna Wintour of Vogue. But his designs seemed lost on Gap customers. One former senior executive recalled seeing a preview of the 2009 holiday collection: it was in spring colors, not traditional holiday ones. Mr. Robinson and the designers were urged to add in festive winter colors, but did not. In the end, Gap rushed in some holiday plaids, so it had something wintry to feature.

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At a Gap denim studio in a downtown Los Angeles warehouse, Rosella Giuliani, at left, the creative director for the 1969 brand, worked on new offerings with Nicole King-Burroughs, women’s design director.Credit
Monica Almeida/The New York Times

Gap also chased too hard the few product lines that did sell. In 2009, it successfully reintroduced the 1969 brand as a higher-end denim line. But when Gap came out with new black pants for women in 2010, it offered them in seven cuts and three lengths and, though they were called “Black Magic,” in the colors of black, navy and gray.

Things came to a head as the designers worked on the 2011 season. Mr. Robinson complained that merchants, who ordered and adjusted the products, were ruining his vision. So Mr. Murphy gave him full control.

“Merchants were literally told, ‘You don’t get to change the product as it’s presented,’ ” one former merchant recalled. “Usually, you want to bring financial history, a consumer focus, make sure you do have a white button-down.”

The clothes that arrived were in drab grays, peaches and roses. Rivals were offering bright solids that season. Gap’s sales kept sinking.

Another worry was quality. Mr. Murphy told investors he would reduce costs, but while that helped Gap’s profits, it hurt its clothes. “Finishes, washes, all the things that gave a garment more character — trims, sweater yarns,” were all switched to lower-cost options, a former Gap designer says. “If there were six things you used to do on a T-shirt, you’d do three or two.”

Cost pressures didn’t lessen as the economy improved. In 2011, Gap’s costs shot up 20 percent amid near-record prices for cotton, and it substituted some cheaper fabrics. “We were worried about the quality,” says the former inventory executive, but there was pressure to meet profit expectations.

Mr. Murphy says that while cotton prices led Gap to make some “responsible tradeoffs,” he disagrees that quality declined earlier, saying that there are many ways to measure quality.

As same-store sales declined, Mr. Murphy concentrated on promotions to drive foot traffic. The creative department began calling itself “the sign shop” because it was printing so many sale posters. It started funneling the $500,000 to $700,000 earmarked for six weeks of window displays to printing and overnighting giant sale signs, according to a former executive.

Money was also a problem in terms of stores. Mr. Murphy was shutting down unprofitable stores as leases expired, part of a strategy to cut store count for Gap North America, including outlets, by about a quarter over seven years. But the company took a piecemeal approach to those that remained — for instance, at top-performing stores, repainting the first several feet and adding hangers and fixtures, but leaving the back of the stores alone.

“The stores weren’t as organized as they could have been, they weren’t as clean as they could have been — sometimes it was sheer fundamentals. They looked like they had been somewhat ignored,” John Ermatinger, who ran Gap’s business in China and Japan until last year, says of the United States stores. “There was no romance.”

In fall 2010, Ms. Hansen introduced a new Gap logo. Within a week, Gap reverted to the old one after customers complained.

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At the Grove, Gap uses what look like window designs throughout its store.Credit
Monica Almeida/The New York Times

By 2011, Gap stores were filled with doleful clothes being sold at huge markdowns. In a major management shakeup, five executives departed. Mr. Murphy replaced Ms. Hansen with Mr. Peck, who had run Gap’s outlets; Mr. Robinson left three months later. Gap’s longtime ad agency was also replaced.

Same-store sales for Gap North America fell 8 percent in 2008 and 7 percent in 2009. After staying about flat in 2010, they dropped 4 percent in 2011. (Banana Republic and Old Navy have faced sales declines, too, though Gap’s have been more pronounced.)

“It’s in the company’s and my best interest to allow the creative team to do what they think is right,” he says.

MR. MURPHY likes executives to build a case for investment before he sends money their way. In 2012, he is letting Gap make its case.

“Glenn’s strategy is, ‘I want to feed investments to the lines of business that are winning,’ ” says Toby Lenk, head of Gap’s online operations. He says Mr. Murphy supported his division’s $150 million addition of Athleta and introduction of the accessories site Piperlime, because of the online unit’s fast growth.

As part of the changes last year, Mr. Murphy named Pam Wallack, known for her work at Gap Kids and Baby, to head a global creative center, overseeing design, production and marketing.

“I’ve never felt the brand has ever been starved,” Mr. Murphy says. “I just think we’ve taken our money and we’ve tried to be balanced about where we put our capital around the world, and in different brands. But it’s never been at the expense of Gap brand.”

He adds: “We know that Gap brand is critical to the future of the company.”

The Gap has been without a head designer since Mr. Robinson’s departure. But recent moves seem to be spurring sales. The clothes are bright and fabrics better. (Mr. Peck mandates a minimum weight for T-shirts and knits.) And Gap has added production flexibility so it can chase trends it initially missed — for instance, it just rushed in floral-printed jeans for women. Gap’s domestic division increased same-store sales by 1 percent in February and 9 percent in March. Margins improved, too.

Mr. Murphy has put Gap’s designers, marketers and production functions under Ms. Wallack’s supervision in New York. Overseas teams, which used to come up with most of their own products, now mostly pick from a central inventory, says Stephen Sunnucks, the head of Gap International.

Ms. Wallack says Gap is emphasizing color and denim, khakis and knits. “We had to restate what Gap was about,” she says.

On a hot spring day at a Gap office in Manhattan, she reviewed 2012 holiday clothing before Gap placed production orders. The room, set up to resemble a Gap store, had snowflakes and white-neon Christmas trees in windows. Mannequins wore winter gear, like an updated cable-knit sweater with a slouchy fit. The rest of the collection was red, navy and camel — peppy and preppy.

It looked like something that had been missing for a long time: it looked like the Gap.

Correction: April 28, 2012

Because of an editing error, an earlier version of this article incorrectly stated that Gap Inc. bought Old Navy after Millard S. Drexler’s arrival as chief executive. Gap Inc. started Old Navy. An earlier version of this article also incorrectly stated that Glenn Murphy was the head of Shoppers Drug Mart when he was chosen as the chief of Gap’s board. He left that position before he was appointed.

A version of this article appears in print on April 29, 2012, on page BU1 of the New York edition with the headline: A Humbled Gap Tries a Fresh Coat of Pep. Order Reprints|Today's Paper|Subscribe